Why Cycles Aren't That Easy

It's easy to understand why one might think cycles are easy to figure out.  Let's take a simple sine wave and call it Figure 1.

Fig. 1:  Sinusoidal wave with wavelength 100 units, amplitude 10.

Actually, the equation used here (and for subsequent figures) was negative cosine, rather than sine, because I wanted the cycle to be at a bottom at timestamp 0.  This cycle behaves as any such sinusoidal wave should:  it bottoms at 0, 100, 200, 300 etc. at a value of -10, reaches its top at 50, 150, 250, 350, etc. at a value of +10, and passes through zero at 25, 75, 125, 175, etc.

Now let's suppose I add a 50-year cycle, with the same amplitude and with its phase set so that its bottom is also at timestamp 0:

Fig. 2:  50-unit and 100-unit cycles combined

Now, at timestamp 0, the value of the "market" (if this is to represent the stock market) is -20.  The 100-unit and 50-unit cycles, both at their respective bottoms, exhibit constructive interference and so our "market" is down much further.  The subsequent top actually occurs a little later than timestamp 25 as would be expected, because while the 50-unit cycle is going down, the 100-unit cycle is still rising.  The same effect occurs in reverse at about timestamp 70, resulting in an earlier peak than expected (while the 50-unit is still rising, the 100-unit is falling).  At timestamp 50, the 100-unit cycle is at a top, while the 50-unit cycle is at a bottom - we get destructive interference and a "market" value of zero (+10-10).

Now, for fun and to illustrate how tricky cycles can become even when there are just a handful, I combine cycles of 100, 64, 36, 16, and 9 units.  They are all of the same amplitude (10) and are all in phase at time unit 0.

Fig. 3:  Several cycles, all in phase, all same amplitude.

Okay.  You can, for the most part, see what's going on.  Obviously at timestamp 0 they all undergo constructive intereference with each other and the "market's" value is -50.  The prominent "triple top" observed by the market has its highs at about timestamps 22, 40, and 58 - these highs, in fact, are 9-unit cycle highs that occur, for the most part, during the "high" phases of the 100- and 64-unit cycles.  Similarly, the high in timestamp upper 80s can be attributed to the juxtaposition of the 64-unit and 16-unit cycles approaching peak and the 9-unit and 36-unit ones just past it.

But would you have been able to figure those cycles out if I hadn't already told you what they were, and if so, how long would it have taken?

Now let's make things more complicated by putting the cycles out of phase at timestamp 0.

Fig. 4:  Like figure 3, but cycles out of phase.

 In this instance I have helpfully included the magnitude of the phase shifts.  Notice how the graph has changed compared to Figure 3 - there's no true "triple top" anymore.  Now, what happens if I mess with the cycles' amplitudes, and add a secular "bullish" linear trend y=0.25*t, where t is the timestamp?

Fig. 5:  As graph title implies.

Notice how suspiciously like a continuation head and shoulders pattern this looks like.  There is a strong "bull" move up in timestamp 35-40 where, if this were a market, fortunes could easily be made on the long side (depending on what the actual market values of this would be).  Similarly, after an extensive topping process including a "bull trap" from about timestamp 53-67, there is an equally powerful "bear" move down from positive 36 or thereabouts to about negative 11.

Now, to further complicate things, let's add some noise.  Using Random.org, I generate for each time stamp a uniformly distributed random number between -15 and +15, and add it to the cycles.  I do this with four different sets of random numbers, which you can consider to refer to different market indices.  These random numbers are supposed to represent smaller variations in the market.  Take their cause how you will - smaller-scale cycles, earnings reports, fundamentals, the psychology of the collective investors, the whims of central bankers, etc.

Fig. 6:  As graph titles imply.

Clearly the prominent larger trends remain intact--there is a strong "bull" move, for instance, at timestamps in the late 30s and a strong "bear" move in the late 50s/early 60s.  But they don't equate--there is significant non-confirmation, for instance, in index I (which peaks at timestamp ~55) relative to indices II, III, and IV (which peak at timestamp ~40).

Obviously, you'd need to use a smoothing algorithm to determine the time cycles from this; the questions, of course, are (1) would you get the right period for the cycles?  (2) would you be able to tell which are of the greatest magnitude?  (3) would your smoothing algorithm catch cycles that aren't there (or ignore cycles that are)?  And it might create more problems if the "noise" is patterned (e.g. Elliott waves) rather than purely random.

Now take into account that I have:

• assumed that the cycles are all sinusoidal in nature
• assumed that the amplitude, phase, and wavelength of each separate cycle are all constant

These assumptions may, in fact, not be valid.

12/28/11

So I technically declare hiatus, and then the next day I come back with a post.  But today's market action was too compelling not to comment.

The path of least resistance is, of course, to assume that today's downward action was [C] of "iv" of (c) of [y] of 2.  1242.82 didn't break (creating 4/1 overlap), so this is still a perfectly logical count, and full-blown invalidation would be at 1229.51.

If this is the case, wave "iii" (39.86 pts) is slightly shorter than wave "i" (40.45 pts), meaning that wave "v" should be shorter still.  The theoretical maximum would be 1248.64+39.86 = 1288.50 SPX.  This is below the 1292 October 27 high - wave [y] would truncate below wave [w].

However, it is worth pointing out that the consolidation last Thursday afternoon (the 22nd) might instead actually be Submin iv itself.  Consider that timing-wise, this would give a one-day wave "i", followed by a clear half-day wave "ii", followed by a wave "iii" that also lasted about a day (maybe about 7, 7 1/2 trading hours) from Wednesday lunchtime to Thursday early afternoon, followed by a half-day consolidation and then a wave "v" that lasts, again, about a day.

Additionally, such a wave "iii" subdivides well into a wave [1] up from 12:30 Wednesday to 1:00, an extended wave [3] from ~1:40 Wednesday through 10:00 Thursday (with an extended Submicro (3) from 2:30 to 3:30 Wednesday), and a wave [5] up from 10:45 Thursday to sometime between 1:30 and 2:00.  Wave [2] of "v" would have been the consolidation during the 10:00 hour Friday, with wave [4] of "v" being the significant rightward move Friday afternoon. 

Lastly, such a third wave would, in fact, not be the shortest wave--even if we place the wave "iii" high at Thursday morning's 1252.25, it would still be 22.74 points compared to wave v's 21.83 up from 1247.54.  Placing the wave "iii" high at the higher 1255 afternoon high, of course, simply makes wave "iii" that much longer.

And it certainly does look like five down from 1269.37...

Hiatus

I have several evening plans this week - lingering holiday festivities etc.  Expect updates this week, if any, to be sporadic.

Market looks very much like it is about to do a 4th wave, if this is not in fact the end of the entire move up (though RSI at several time scales seems to suggest we still have a little more up left to go).  We are no longer hourly overbought, though a little more down (say, a gap down open tomorrow) would look nice.  A thrust to 1270 or so with lower RSI would likely be the top (or at the very least, the top of Submin iii of (c)).

12/20/11 - Santa Claus in Town After All?

There will not be a post tomorrow.

The seven waves down from 1267 was followed by an explosive up move.

Today's action provides strong evidence in favor that this is in fact Minuette (c) of [y] of 2, or even (iii) of [c] of 2, or if you're a permabull, (iii) of [iii] of 3 of (1) of P[3] up.

I do not think the move from 1267 counts well as an impulse.  In order for it to be a "five", the span from what I have labeled Micro [3] of "e" all the way through the "f" top would have to be [4] of an extended "v", which means "c" has to be "iii" and it would be the shortest wave.

Assuming the HOD is the top of wave "i", and with 5- and 1-minute technicals weakening throughout the afternoon there is no reason to assume it can't be, we notice a peculiar parallelism to wave "i" of (a) of [y]:  "i" of (a) ran from 1158.67 to 1197.35, a 38.68-point, 3.34% rise, whereas "i" of (c) ran from 1202.37 to 1242.82, a 40.45-point, 3.36% rise.  The rises are almost exactly the same in percentage terms, which might suggest A=C on a log scale.

If this is to be the case, since wave (a) was a 9.35% rise from its 1158 low, we would expect wave (c) to be the same, which would put it the target at 1314.85, which is near that 1370-1356 trendline I keep talking about.  Minuette (a) took 8 days to reach its peak; if Minuette (c) does the same, it would place the top on the final trading day of the year.  Happy New Year, everybody!

12/19/11

Let's eschew the actual degrees of the subwaves following the 1267.06 high.  We can clearly see that there are seven waves down of significance.

If this is the first significant wave down of Minor 3 (either Minuette (i) of [i] of 3, or Minute [i] itself), then we would expect there to still be an eighth and ninth wave of the move.  Given that the most dominant motion of the move was the downswell on 13-14 December, it would not be unreasonable to consider that the 3rd of 3rd and therefore that what I have labeled as Submins iii, iv, v, vi, and vii are really Micro [1], [2], [3], [4], and [5] of iii.

The more bullish (at least for now) possibility, is that we are in, or have just finished up, Minuette (b) of [y] of 2 (or, if you prefer, Minute [b] of Y of (2)).  If this is the case, we have room for a marginal new low, provided we do not go above around 1215 before making it.  If we go above 1215, one becomes hard-pressed not to consider any new low to be of significance, which would make it wave "ix" of the down move severely weakening the bullish case (unless another mild 4-5-type move comes into play, in which case you could consider it an 11-wave correction, but...)

One of the things favoring the bullish possibility is the SPX having made a lower low on higher hourly and 30-minute RSI and MACD.  It is also just about touching the 100-day SMA, which has acted as support in several instances recently (though, oddly, not as resistance when touched from below) - March, mid-July, and early November.  An A=C bounce from today's lows would get us into the 1310s, which is rather close to the major resistance trendline from 1370-1356 (which is now in the lower 1320s). 

On the other hand, the fractal similarity between the move from 1292 and the month of July doesn't bode well for the markets... what if Santa really is just your parents after all?

12/15/11 - Shiny Yellow Metal

I'm going to talk about gold today.

It looks as if gold is in a significant correction in an overall secular bull market.  This is the left-hand count.  Based on the length of the waves, we probably had a top of at least Intermediate degree.  (If it was an Intermediate (5), of course, then a Primary wave down is now underway and the right-hand count is in effect.

The main point of order is that the late-August/early-September move in gold looks like a "three" rather than a "five".  StockCharts does not show intraday on precious metals, but I have trouble counting it as five waves in the absence of any intraday data.

These charts suggest there is still more downside in gold to come, even if it's just a correction.  How far?  Well, the channel parallel to 1917-1804-1767 and crossing through the Minor A (if it is that) low at 1535 currently is in the 1430s.  If there's an overshoot, and/or Minute [iv] lasts a while, it could theoretically see sub-1400 before turning back up again (either in the next leg up of the bull market, or in Minor 4 of a new bear market.)

Musings on the Education Bubble

I think the main impetus driving the development of the education bubble was the Cycle IV recession in the '70s.  This long-lasting recession, coupled with the cessation of things like the Vietnam War, the opening of China and its eventual conversion into de facto state capitalism, the increasing availability of computers in the late '70s into the '80s, the inflation-adjusted price of oil peaking in 1980, and even the various social movements that took place in the '60s and '70s, probably all played a role in it.

So you have a long-lasting recession driving companies to start automating and offshoring to save costs, which also raises their profits during the subsequent bull market by cutting down on overhead.  Generally, as Paul Krugman and his citations point out, the easiest jobs to automate are those involving a generally fixed, easily programmable routine (whether blue- or white-collar).  With the comparatively slow computers of the '80s, this generally meant things like assembly line work.  Offshoring, likewise, probably hit manufacturing the hardest because (1) the telecommunications infrastructure wasn't yet in place to enable cost-effective offshoring of any white-collar work, and (2) unlike construction, maintenance, and the like, you don't actually need to be on site for manufacturing—you can simply have the product made overseas and shipped to the U.S. (or wherever) when done.

Also, you have government (which, at least during this time, wasn't really affected much by the recession) growing, and a significant percentage of government jobs are skilled white-collar ones that are best done with a college degree.  And you also have the Japanese Bubble in full roar which of course is making some people fear America is "falling behind" educationally (you see this sentiment today as well, just with China).  And you have an increase in high-tech, which requires educated workers who know what they're doing.  And you also have Sallie Mae, and with a Cycle-degree bull raging—and especially afteer the fallout from "Black Monday" in 1987 subsided—what's a little more credit?

Essentially, then, you have the blue-collar manufacturing economy faltering, being automated, or shipped overseas, while at the same time skilled white-collar jobs are growing in number, even during these mild recessions.  You can see from that how the "everyone should go to college because it practically guarantees you a good job, and not going to college means you probably won't be able to get any job better than flipping burgers" mentality came about. 

On top of this, you also have the various social movements dedicated to stopping inequality (real or perceived) whose heyday was in the '60s and '70s.  If not enough members of X group go to college, they'll be stuck in the same positions they were shunted into by prior prejudices—how is this progress?

So, you have:

• ·         Fewer decent-paying but unskilled or semi-skilled blue-collar jobs that don't require a college degree and for which they made no pretense that one was required, which seem to be the most affected by recession 
• ·         More decent-paying skilled white-collar jobs that legitimately require a college degree, which seem to be the least affected (if at all) by recession
•          More people wanting, needing, and/or feeling it is their right to go to college / send their kids to college 
•          Greater ability of these people to afford college (owing to student loans, etc.)

This results, of course, in a higher demand for college admissions, which can either be met by raising tuition prices, by expansion of existing colleges / building of new colleges, or (because Sallie Mae will be there for you) both.  You end up with a higher supply of college students, which results in a higher supply of college graduates.

Now, let's pretend you're a company.  You're hiring for a certain position with three open slots and a hundred applicants.  In your hiring process, you obviously give weight to persons with a college degree (preferably in your field, but a degree in any field is better than no degree at all).  In ye olde dayes, you might have, say, 10 applicants with a degree (of which 4 are in your field), while the remaining 90 don't.  Since there are 3 open slots, if your degree is in the field in question you probably have about a 3/4 chance of being hired, assuming all four candidates are roughly equal.  If it's not in the field, don't despair—you may be a better candidate than the ones in the field because of experience, interview answers, or in general the other factors besides education that play a role in the hiring process.

But today, you have 70 applicants with a degree (of which 20 are in your field), and 30 without.  There are in fact now two open slots, because the third was consolidated or something to that effect.  Your chance of being hired is effectively 1/10 if all candidates are equal every other way.  The degree isn't a magic ticket like it used to be.

The trouble, of course, is that it's still more valuable to have a degree than to not have one.  Those 30 people with no college education at all—they're not getting hired, it's going to be two out of the top 70 (and probably, but not necessarily, out of the top 20).  In other words, the high supply of graduates leads to a lower marginal value of having the degree.  But there is still marginal value. 

Is it worth the cost?  Maybe.  Maybe not.  The point is, perception has now shifted towards the degree being a virtual necessity to have just about any job at all.  This of course, results in a higher demand for college admissions, higher tuition prices, higher student loan debt, a higher number of graduates, and a still-lower but non-negative marginal value of having the degree.  And I haven't even got into the role that professiorial tenure and collegiate athletics might have to play in this.

The billion-dollar question, of course:  What bursts the bubble?  Well, most likely a social mood shift, as (obviously) suggested by The Socionomist, as well as by the "Schumpeter" blog on The Economist, both of which suggest the early stages of this are already starting to happen.  The insulation created by the state support for public universities and the prestige factor (and thus higher demand) for private universities has likely dampened any immediate recessionary impact; the Primary-degree "recovery" has likely delayed the reaction further.

12/13/11

Placing protective stops is a very good thing.  I know that many people seem to think otherwise, citing fear of the Eeeevil Algorithms, but... when you're assured a profit if they trigger...

Yesterday I bought UWM, the double-long Russell 2000 ETF, at about 33.80/share.  When it gapped up today, I set a stop at 34.60, which of course triggered before 11:00.  UWM closed today at 32.88.

While only three waves down were seen today, they certainly looked impulsive.  This is most easily seen on the 5-minute chart, which I have posted - this morning's move down looks like five waves of what I think are Miniscule degree.  The operative question is whether Submicro (3) ended at today's low, or if that was simply Miniscule 5 of a 9-wave move and we have still further to go.

Using the "2008=2011" analogue suggests that today was May 20, 2008 - one day after the May 19 Intermediate wave (2) of P[1/A/W/donut] top at 1440.  If indeed Minor 2 (if this was in fact Minor 2) did end in a truncation at ~1267, and if we're going to follow the same pattern, we should drift downward into early February, move choppily up until mid-March, and the wheels fall off the cart sometime around April - sell in May and be too late.  I doubt the pattern will persist for so long, but....

The obvious near-term bull count is that this is (b) of [y] of 2.  Daneric has a good chart showing the most viable count for this, which suggests that if that is indeed the case, it just now ended.  Certainly, there is reason to believe that (c) of [y] could be coming - today's low was at higher RSI on a few timescales (though not at 5-minute) - on the other hand, we do have that 2008=2011 pattern that is still holding, and I have the strong feeling that when today does finally break ranks with 2008, it will be a break to the downside.

At any rate, I don't want to go long again unless 1238 is breached before any new lows are made.

12/12/11

The market went down today.  Except at the end, when it went up.

We bottomed out today at 1227.25, which is a couple points over the 38.2% retracement level (1224-25) for a (b)-wave correction.  It is reasonable to think that this correction could be over, in which case we just started (c) of [y] up - the last hurrah before Minor 3.  Allowing today's low to be the right shoulder of an IHS suggests an upside target of about 1304 - well within the 78.6% correction range of the entire 1370-1074 move.  The 1370-1347 trendline crosses this area in the next couple of weeks.  Again, I would not expect the market to go much higher than 1320, which is where the 1370-56 trendline currently runs through.

On the other hand, the action from Dec. 5-7 looks very much like a topping pattern - desperately trying to make it back above the 200-day moving average, only to be rebuffed by it each time.  The moves on December 6 and 7 are very clearly "three up" from the lows, which is of course the reason why I initially treated the action as a triangle.

Bears should note that the sideways action during this time period can still be treated as a triangle - obviously not (b) now; my previous count was invalidated by movement below 1231.47 - but very possibly "iv" of (a) of [y], or even (iv) of [c/y] of 2, with 1258.25 being the truncated fifth wave of the same action.  This last scenario is the most immediately bearish:  it suggests that we started Minor 3 already.

Finally, it still must be taken into account that 1292 as the Minor 2 high is still a possibility - not only have we not breached it, we have yet to breach the trendline from 1356-47 downward which touched 1292 and the tip of the more-or-less horizontal top at 1266-67. 

The argument against is that the move from 1292 to 1158 looks blatantly like a "three" (which is why my primary count is still bullish near-term), but it could theoretically be Minuette (i) of a leading-diagonal Minute [i].  Yes, LD's are supposed to be 5-3-5-3-5... and you should have shorted silver at $20/ounce.  If this does happen to be the case, Minuette (ii) is over, Santa is your parents, and prepare for a move down to at least the lower 1100s.

12/10/11 - Looking at the Large Scale

Sometimes it helps to take a step back and look at the larger picture - otherwise we risk losing the forest for the trees.

The above graph shows the B and C waves of the recent corrective Primary wave (which I deliberately don't identify).  Stepping out at this scale shows us a few things we might have lost in the Micro and Submicro waves of intraday charts.

The upper thick black line is, of course, the 1370.58 invalidation of the entire Primary count.  The thick red line is the trendline from 1370 (May 2) to 1356 (July 7).  This line is in the 1320s for the rest of this month, and I think it would provide strong resistance should the market manage to make it there.

The thick pink line is the trendline from 1356 (July 7) through 1347 (late July), which comes awfully close to marking the 1292 high, and which, notably, has not been retested since 1292: all the action since then has been contained beneath it.  It is entirely possible that the line may in fact not breach at all--Minuette (c) of [y] may truncate or barely surpass Minuette (a), making [y] truncate as well, which would not be out of character if Minor 3 is imminent.

For ease of exposition I have offered a "road map" for the rest of Intermediate (1) (assuming, of course, that the October low was only Minor 1 of (1)).  In order to make the graph visible, the slopes are shallower than they will probably be.  It is entirely possible that more Zweig breadth thrusts will be triggered during Intermediate (2) if it acts as a typical second wave (sharp and not particularly long-lasting); Intermediate (2) will probably be associated with some sort of excuse - likely an announcement and/or inception of QE3.

The rising black line from the Intermediate (B) low to the Minor 1 of (1) low is a logical termination point for Intermediate (2) (and before that, Minute [ii] of Minor 3), but its ability to get there may depend on how far back up the market has to travel.  Although given the market's recent penchant for steep retracements, it should not be ruled out.

12/8/11

Nothing really has changed.  I thought that the 1267 yesterday might have been the "d" wave of some sort of triangle (either for wave 4 or B).  Today's action is conducive with an overshooting "e" wave.  I actually hope this is the case, as I'm currently positioned long the market.

On the other hand, the move down has been rather powerful, and breached the triangle bottom three times with the last, EOD selloff being a solid breach.  And early futures do not look like there is much relief.

If this is E of 4/B of C/Y/(A of Y) of 2, there is little room to keep going down - the market must go back up TOMORROW.  The alternatives are as follows:

• The primary, short-term bullish alternate:  My A-B-C of the triangle are in fact the A-wave of a flat (which probably makes up B of Y), with the B-wave being my D-wave and the C-wave being my E-wave.  Note that we CAN count 9 waves up from 1158.67, which is conducive with this being an A-wave.

• The superbullish alternate:  Same as above, but instead of being B of Y of 2, it is a wave 2 correction of a bull-market impulse (probably 2 of 3 up).

• The bearish alternate:  Wave C/Y and thus 2 is already over and I will look incredibly stupid come the start of next week for having been long.

  It should, I think, be pointed out that a Y=0.618*W (or C=0.618*A) move from 1158.67 puts us at 1293.32... just a tiny bit over 1292.66.  I would be highly amused if it were to work out that way.

12/5/11

One of the problems with the market is that it makes it difficult to figure out what it's doing sometimes.

One reason it might be this way is because it's in a complex correction and possibly undergoing Intermediate (2) already, particularly if we're in the bearish leading diagonal I discussed on the 29th and this is a P[3] whose target is "only" a shade under 600. 

If this is the case, then we are either in Minute [y] of Minor 2 (of a "superbear" Prechterian P[3]) or Minor Y of Intermediate (2) of my little LD bear P[3] (which is still pretty superbearish, but allows for more time extending, pretending, and making desperate attempts at saving stuff). 

The move up since November 28, manifested by the lime-green overlaid line, is weaker in thrust and in technicals than the move from October 4-12 (manifested by the black line).  Notice in particular the lower slope and weaker RSI.  If that move is [a] of W (or 2 - the "1292 is the top" count hasn't technically been invalidated yet, though it is on thin ice), then it follows that this is probably [a] of Y.

In my opinion, the line in the sand for the bearish case is the downward trend from the May 2 1370 high to the July 7 1356 high.  This line is in the 1320s for the rest of December.  I believe that, should this line be breached and a full hourly candle be made above it to the upside, this is strong indication that we are in a bull market (or at least the most absurdly mutated [C] of Cycle b (see e.g. the Nasdaq) ever).